Your business has a life cycle. It begins when you launch the company, continues as you grow it and comes to completion when you either sell the business intact or liquidate its assets. Each of these stages requires a unique tax strategy. The good news is that as your business grows, you can easily plan ahead with your CPA. The first step in that planning is consulting with your CPA when you start your business.

Mistake No. 1: Not Choosing the Right Entity at the Start

In the beginning, it is easy to be excited about your new business venture and want to start it as soon as possible. However, if you don’t choose the right entity structure when forming the business, you may pay more than is necessary to Uncle Sam.

There are several entity types to consider, but the most common are sole proprietorship, limited liability company (LLC) and a corporation. Each one of these has unique functions and tax outcomes that accompany it.

Sole Proprietorship // Although sole proprietorships are easy and inexpensive to form, they also have potentially the worst tax outcome of any of the entities. All earned income is subject to self-employment tax, and all business information is reported on the owner’s individual tax form. Besides potentially paying the largest amount of tax, when your business gets audited by the Internal Revenue Service all other items on your individual return are scrutinized as well. This is in contrast to other entity forms that allow you to keep your business and personal returns somewhat separate.

Limited Liability Company // This entity is the most flexible and recommended by many attorneys and accountants. LLCs allow you to choose to be taxed as a sole proprietorship (one-owner LLC), partnership, corporation or S corporation. LLCs are also more flexible from a tax perspective over the life of your business. During the launch phase, it may be more appropriate to be taxed as a partnership so you can take advantage of the losses you incur early in the life of the business. As the business matures and becomes more profitable, the owner may want to change to being taxed as an S corporation to control the amount of the money that is subject to FICA and Medicare tax (the functional equivalent
of self-employment tax).

Corporations // As one of the more traditional entities (and also the most expensive to form), corporations have had a long history of clearly stated IRS rulings and guidance. Entities structured as a corporation can be taxed as either a corporation or an S corporation.

Mistake No. 2: Not Doing Proper Tax Planning

Clients don’t take advantage of the opportunity to do both short- and long-term tax planning with their CPA. If you don’t invest time to work with your CPA, the only thing he or she can do is play the cards that have been dealt. However, if you partner with your CPA prior to year-end and do some planning, you will accomplish several things, including the ability to manage your tax burden instead of just reacting to it. Most CPAs are using cloud-based applications that make trading files and information easy, so getting the information to them for proper tax planning is simplified.

There are usually several tax deductions you can consider prior to Dec. 31, which can have a significant impact on your tax situation. Two of the most popular deductions are purchasing needed equipment before Dec. 31 and establishing a deductible retirement plan.

Mistake No. 3: Not Having an Exit Strategy

The first question your CPA should ask you is, “How do you want to leave or exit your business?” Small business owners often don’t consider how to get out of the business with the largest return possible. Creating an exit strategy at the same time you are launching the business can help you minimize your tax burden when you sell or end the business.

Additionally, there are ways that you can structure a sale of assets to minimize your tax burden even if you didn’t think about your exit strategy when you made your entity selection in the beginning. This is a clear opportunity to get assistance from a CPA or an attorney in structuring the deal in the most tax-favored way possible.

No matter if you are launching a new business, growing an existing business or selling or exiting the business, your CPA can guide you through the decisions you need to make for every stage.

It’s like Vince Lombardi said: If you want to be successful, “plan your work and work your plan.”